[hsaki]

Can anyone explain the advantages-disadvantages and who is most likely to be hit with AMT and who is not, etc. Thanks

[MukatA]

The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax. This additional tax is called the alternative minimum tax (AMT).

For more information about the alternative minimum tax, see the instructions for Form 1040, line 45, and Form 6251, Alternative Minimum Tax—Individuals.

[ebaines]

It can be difficult to follow through the various tax forms and see how AMT works. But in a nutshell, it works like this:

1. Calculate your tax the "normal" way.
2. Calculate your tax the AMT way
3. Pay the larger of the two.

The way the forms work is that AMT is calculated as an addition to the regular tax, so it seems like a surcharge. But in reality it's a completely different system that gives you a higher deduction than the regular way, but excludes some of the more significant deductions (such as state and local income and property tax deductions), and then taxes the ordinary income (wages, interest, etc )at a flat 26%. Capital gains and dividends still enjoy lower rates as with the regular tax. When Congress first set this up it tended to hit only a few, generally very wealthy individuals with extraordinary deductions. But they failed to index it for inflation, the flat rate of 26% hasn't changed even as the Bush trax cuts lowered the "regular" tax brackets, and given what's happened to property taxes in many states it now hits many people who are definitely not "wealthy." It tends to hit people in high tax states (like California and NY - think blue on the electoral map) harder than low tax states.